Would the New NAFTA Reduce Policy Uncertainty?

Provisions That Reduce Policy Uncertainty for International Data Transfer, Cross-border Services, and Investment

Many of the provisions in USMCA represent commitments to maintaining current regulatory conditions. In many of these cases, firms have operated under regulatory conditions in which there are no specific policies in place ensuring that regulations do not change in the future. For example, the United States, Canada, and Mexico have yet to establish many types of regulations potentially governing international data transfers. Up to now, firms have largely been able to transfer data freely between the countries. However, no current policies protect this free flow of data from future policies that might restrict it. The commitments in USMCA address this regulatory uncertainty by providing assurance to firms that current conditions will be maintained into the future.

...

USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA. Of these, three groups of provisions were modeled as components in the economy-wide framework: international data transfer, cross-border services, and investment commitments. These USMCA provisions were addressed in the economy-wide modeling in a way that is informed by trade literature. For each of the provisions, an effect was estimated that reflects the potential impact of USMCA members altering current conditions. For example, in the case of the data transfer provisions, a cost associated with the introduction of data flow restrictions was estimated based on Organisation for Economic Cooperation and Development (OECD) services trade data and the OECD Services Trade Restrictiveness Index (STRI). The STRI reflects nontariff measures that affect services trade—including data transfer regulations. This cost estimate was then weighted to reflect that USMCA does not remove data flow restrictions but rather removes some uncertainty surrounding these restrictions. ...

The ITC says that "many" USMCA provisions "represent commitments to maintaining current regulatory conditions" and "USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA." I'm not sure what the full range of these provisions/regulatory conditions is (if there is a detailed list somewhere in the report, please let me know!), but the ITC specifically mentions the "free flow of data" as an example, so let's look at the relevant USMCA provision and see how it addresses regulatory uncertainty "by providing assurance to firms that current conditions will be maintained into the future."

Article 19.11 is titled Cross-Border Transfer of Information by Electronic Means, and states:

1. No Party shall prohibit or restrict the cross-border transfer of information, including personal information, by electronic means if this activity is for the conduct of the business of a covered person.

That provision makes it pretty clear that there shall be no prohibitions or restrictions on the "cross-border transfer of information ... by electronic means if this activity is for the conduct of the business of a covered person." So that should provide certainty for the free flow of data, right? North American data will flow freely forever.

But wait, there's a second paragraph, which says this:

2. This Article does not prevent a Party from adopting or maintaining a measure inconsistent with paragraph 1 that is necessary to achieve a legitimate public policy objective, provided that the measure:

(a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and

(b) does not impose restrictions on transfers of information greater than are necessary to achieve the objective.5

---------------------------------

5 A measure does not meet the conditions of this paragraph if it accords different treatment to data transfers solely on the basis that they are cross-border in a manner that modifies the conditions of competition to the detriment of service suppliers of another Party.

My uncertainty is growing. Could one of the USMCA governments restrict the free flow of data pursuant to this exception? Practically speaking, I'm really not sure how this would play out. What kinds of restrictions are under consideration by governments right now? How would they fare under the chapeau of paragraph 2 and the sub-provisions? Do they achieve a legitimate public policy objective? Are they necessary for that purpose? Are they applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade? Do they impose restrictions on transfers of information greater than are necessary to achieve the objective (and didn't we already look at that under the chapeau)? It's hard to analyze all this in the abstract, but I'm feeling a bit uncertain right now

And there's more than just that data-specific exception. There is also this from the general exceptions in Article 32.1:

2. For the purposes of Chapter 15 (Cross-Border Trade in Services), Chapter 16 (Temporary Entry for Business Persons), Chapter 18 (Telecommunications), Chapter 19 (Digital Trade), and Chapter 22 (State-Owned Enterprises and Designated Monopolies), paragraphs (a), (b), and (c) of Article XIV of GATS are incorporated into and made part of this Agreement, mutatis mutandis.

How would these GATS exceptions apply to any restrictions that might be imposed on data transfers? Would the analysis differ from that carried out under Article 19.11, paragraph 2?

And if it's data transfers we are talking about, I can imagine cybersecurity could come up, which might implicate the security exceptions:

Article 32.2: Essential Security

1. Nothing in this Agreement shall be construed to:

(a) require a Party to furnish or allow access to information the disclosure of which it determines to be contrary to its essential security interests; or

(b) preclude a Party from applying measures that it considers necessary for the fulfilment of it obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

As we saw recently in the Russia - Traffic in Transit WTO panel report, this kind of exception is broader than the other public policy exceptions, giving governments more flexibility to regulate.

With all of these exceptions in play, how much certainty is there about the treatment of data flows under these provisions? Is data going to flow freely, or is there plenty of room for new regulations (under, say, President Warren)?

Speaking of uncertainty, the USMCA doesn't just prohibit regulation, it also requires it. Here's one example:

Article 19.13: Unsolicited Commercial Electronic Communications

1. Each Party shall adopt or maintain measures providing for the limitation of unsolicited commercial electronic communications.

2. Each Party shall adopt or maintain measures regarding unsolicited commercial electronic communications sent to an electronic mail address that:

(a) require suppliers of unsolicited commercial electronic messages to facilitate the ability of recipients to prevent ongoing reception of those messages; or

(b) require the consent, as specified in the laws and regulations of each Party, of recipients to receive commercial electronic messages.

3. Each Party shall endeavor to adopt or maintain measures that enable consumers to reduce or prevent unsolicited commercial electronic communications sent other than to an electronic mail address.

4. Each Party shall provide recourse in its law against suppliers of unsolicited commercial electronic communications that do not comply with a measure adopted or maintained pursuant to paragraph 2 or 3.

...

I don't have great hopes that email spam is going away anytime soon, but it sounds like governments might be required to do more regulating than they are currently doing, in some uncertain way.

So that's a short summary of domestic data transfer regulation and the corresponding USMCA provisions. Has policy uncertainty been reduced or increased? What are the implications of all this for the North American economy?

And that's just data transfer. What are all the other aspects of how the USMCA may or may not reduce policy uncertainty, and how do you model that?

I believe this is the first time the ITC has carried out this kind of analysis. I can imagine that the next time the ITC considers the impact of a trade agreement, there will be a wide range of interest groups armed with critiques of its approach to the issue of "reducing policy uncertainty." This may be the beginning of a long debate.

Comments

Provisions That Reduce Policy Uncertainty for International Data Transfer, Cross-border Services, and Investment

Many of the provisions in USMCA represent commitments to maintaining current regulatory conditions. In many of these cases, firms have operated under regulatory conditions in which there are no specific policies in place ensuring that regulations do not change in the future. For example, the United States, Canada, and Mexico have yet to establish many types of regulations potentially governing international data transfers. Up to now, firms have largely been able to transfer data freely between the countries. However, no current policies protect this free flow of data from future policies that might restrict it. The commitments in USMCA address this regulatory uncertainty by providing assurance to firms that current conditions will be maintained into the future.

...

USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA. Of these, three groups of provisions were modeled as components in the economy-wide framework: international data transfer, cross-border services, and investment commitments. These USMCA provisions were addressed in the economy-wide modeling in a way that is informed by trade literature. For each of the provisions, an effect was estimated that reflects the potential impact of USMCA members altering current conditions. For example, in the case of the data transfer provisions, a cost associated with the introduction of data flow restrictions was estimated based on Organisation for Economic Cooperation and Development (OECD) services trade data and the OECD Services Trade Restrictiveness Index (STRI). The STRI reflects nontariff measures that affect services trade—including data transfer regulations. This cost estimate was then weighted to reflect that USMCA does not remove data flow restrictions but rather removes some uncertainty surrounding these restrictions. ...

The ITC says that "many" USMCA provisions "represent commitments to maintaining current regulatory conditions" and "USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA." I'm not sure what the full range of these provisions/regulatory conditions is (if there is a detailed list somewhere in the report, please let me know!), but the ITC specifically mentions the "free flow of data" as an example, so let's look at the relevant USMCA provision and see how it addresses regulatory uncertainty "by providing assurance to firms that current conditions will be maintained into the future."

Article 19.11 is titled Cross-Border Transfer of Information by Electronic Means, and states:

1. No Party shall prohibit or restrict the cross-border transfer of information, including personal information, by electronic means if this activity is for the conduct of the business of a covered person.

That provision makes it pretty clear that there shall be no prohibitions or restrictions on the "cross-border transfer of information ... by electronic means if this activity is for the conduct of the business of a covered person." So that should provide certainty for the free flow of data, right? North American data will flow freely forever.

But wait, there's a second paragraph, which says this:

2. This Article does not prevent a Party from adopting or maintaining a measure inconsistent with paragraph 1 that is necessary to achieve a legitimate public policy objective, provided that the measure:

(a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and

(b) does not impose restrictions on transfers of information greater than are necessary to achieve the objective.5

---------------------------------

5 A measure does not meet the conditions of this paragraph if it accords different treatment to data transfers solely on the basis that they are cross-border in a manner that modifies the conditions of competition to the detriment of service suppliers of another Party.

My uncertainty is growing. Could one of the USMCA governments restrict the free flow of data pursuant to this exception? Practically speaking, I'm really not sure how this would play out. What kinds of restrictions are under consideration by governments right now? How would they fare under the chapeau of paragraph 2 and the sub-provisions? Do they achieve a legitimate public policy objective? Are they necessary for that purpose? Are they applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade? Do they impose restrictions on transfers of information greater than are necessary to achieve the objective (and didn't we already look at that under the chapeau)? It's hard to analyze all this in the abstract, but I'm feeling a bit uncertain right now

And there's more than just that data-specific exception. There is also this from the general exceptions in Article 32.1:

2. For the purposes of Chapter 15 (Cross-Border Trade in Services), Chapter 16 (Temporary Entry for Business Persons), Chapter 18 (Telecommunications), Chapter 19 (Digital Trade), and Chapter 22 (State-Owned Enterprises and Designated Monopolies), paragraphs (a), (b), and (c) of Article XIV of GATS are incorporated into and made part of this Agreement, mutatis mutandis.

How would these GATS exceptions apply to any restrictions that might be imposed on data transfers? Would the analysis differ from that carried out under Article 19.11, paragraph 2?

And if it's data transfers we are talking about, I can imagine cybersecurity could come up, which might implicate the security exceptions:

Article 32.2: Essential Security

1. Nothing in this Agreement shall be construed to:

(a) require a Party to furnish or allow access to information the disclosure of which it determines to be contrary to its essential security interests; or

(b) preclude a Party from applying measures that it considers necessary for the fulfilment of it obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

As we saw recently in the Russia - Traffic in Transit WTO panel report, this kind of exception is broader than the other public policy exceptions, giving governments more flexibility to regulate.

With all of these exceptions in play, how much certainty is there about the treatment of data flows under these provisions? Is data going to flow freely, or is there plenty of room for new regulations (under, say, President Warren)?

Speaking of uncertainty, the USMCA doesn't just prohibit regulation, it also requires it. Here's one example:

Article 19.13: Unsolicited Commercial Electronic Communications

1. Each Party shall adopt or maintain measures providing for the limitation of unsolicited commercial electronic communications.

2. Each Party shall adopt or maintain measures regarding unsolicited commercial electronic communications sent to an electronic mail address that:

(a) require suppliers of unsolicited commercial electronic messages to facilitate the ability of recipients to prevent ongoing reception of those messages; or

(b) require the consent, as specified in the laws and regulations of each Party, of recipients to receive commercial electronic messages.

3. Each Party shall endeavor to adopt or maintain measures that enable consumers to reduce or prevent unsolicited commercial electronic communications sent other than to an electronic mail address.

4. Each Party shall provide recourse in its law against suppliers of unsolicited commercial electronic communications that do not comply with a measure adopted or maintained pursuant to paragraph 2 or 3.

...

I don't have great hopes that email spam is going away anytime soon, but it sounds like governments might be required to do more regulating than they are currently doing, in some uncertain way.

So that's a short summary of domestic data transfer regulation and the corresponding USMCA provisions. Has policy uncertainty been reduced or increased? What are the implications of all this for the North American economy?

And that's just data transfer. What are all the other aspects of how the USMCA may or may not reduce policy uncertainty, and how do you model that?

I believe this is the first time the ITC has carried out this kind of analysis. I can imagine that the next time the ITC considers the impact of a trade agreement, there will be a wide range of interest groups armed with critiques of its approach to the issue of "reducing policy uncertainty." This may be the beginning of a long debate.